Management of public undertakings plagued by problems

Toomas Mattson | 9/17/2013 | 4:26 PM

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TALLINN, 17 September 2013 - The National Audit Office finds in its audit report that the management of the operations of public undertakings and owner’s supervision has basically not improved at all in five years – often, the state doesn’t know why it maintains certain undertakings and what it expects from them. The state has not set clear goals for the undertakings or does not check whether goals are achieved. Irrespective of this, public undertakings have been given several hundred million euros of taxpayers’ money.
The Minister of Economic Affairs and Communications who manages the largest public undertakings agreed mostly with the conclusions and recommendations made by the National Audit Office, but the Minister of Finance who coordinates the management of public undertakings did not agree with them at all.

Public undertakings own five billion euros worth of assets, i.e. approximately a quarter of all assets of the public sector. These undertakings invest more money than is invested from the state budget and pay the state tens of millions of euros in dividends every year. Public undertakings are assets managed by ministers and the state of these assets has a strong impact on the economy and development of the entire state.
Director of Audit Tarmo Olgo says that commercial undertakings obviously operate on the basis of a plan approved by the owner and the supervisory board as the representative of the owner assesses how well the undertaking has managed to follow the plan. However, the audit revealed that the owner of public undertakings has often not set any goals for them – almost half of the audited undertakings had no strategies approved by the supervisory board. As at the beginning of 2013 the biggest public undertaking Eesti Energia did not have a strategy approved by the supervisory board either.
And in undertakings that do have such a strategy, the supervisory board does not assess its implementation or the achievement of the goals set for the undertaking by the state. The was only one among the nine audited undertakings where the supervisory board assessed the strategy comprehensively with its resolution every year – this company is Elering, which the National Audit Office would like to praise and set as an example to others.
The lack of a strategy, however, has not prevented the undertakings from investing and the state from giving them hundreds of millions of euros. The state had given the audited undertakings ca. 227 million euros from the state budget from 2006-2012.
The lack of a strategy approved by the supervisory board or the failure to assess the performance of a strategy is the supervisory board’s responsibility and negligence, because it’s their duty to identify the owner’s interests, demand that the management board prepare a strategy that meets these interests and approve the strategy with its resolution if it’s suitable.
The interviews conducted in the course of the audit also revealed that officials, management board members and in some cases also the chairmen of supervisory boards find that the capability of supervisory boards of having a say in setting the goals of undertakings and then assessing them is often poor. The reasons suggested are the practice by which supervisory boards are formed and the lack of transparency in the appointment of members, which means that the people on the supervisory boards don’t have the necessary skills and knowledge.
However, it is also somewhat unclear what the owner actually expects from supervisory board members in the management of the undertaking and how a member of the supervisory board should be held responsible if the undertaking’s performance deteriorated significantly as a result of the member’s incompetence or negligence.
The problems in setting goals for undertakings and in owner’s supervision largely start from the owner’s failure to explain to itself why it needs to keep these undertakings. Ministers as the managers of the holdings are obliged to report to the Government of the Republic every year and explain why owning each and every undertaking is still necessary, but the reasons they give are superficial, laconic and repeated without changes year after year.

The National Audit Office has audited the activities of the state in steering the undertakings and guaranteeing owner’s supervision also in the past. In 2007 the National Audit Office published the report Owner’s Supervision in Public Undertakings and Foundations, where the observations and conclusions we made were largely similar to those in the new audit completed in 2013. Steering the activities of public undertakings and owner’s supervision have not improved in these five years.

The Minister of Economic Affairs and Communications, who manages the biggest public undertakings, agreed with the conclusions made by the National Audit Office and found that its recommendations were largely appropriate. The minister highlighted the activities that had already been initiated in his area of government to improve the management of public undertakings and emphasised that it is necessary to word the principles of having holdings in public undertakings; set specific expectations and goals to the operations of undertakings; and to perfect the process of forming the supervisory boards of undertakings.

The Minister of Finance as the minister who coordinated the management of public undertakings did find that the expedient management of holdings can be improved further, but only agreed with one of the recommendations made by the National Audit Office. The minister basically agreed with the National Audit Office that all undertakings must have a strategy and budget, and promised to analyse whether the State Assets Act must be updated to guarantee that they are prepared.

The Minister of the Environment, the Minister of the Interior and the managers of the audited undertakings largely agreed with the conclusions and recommendations made by the National Audit Office.
 

Background

The National Audit Office wanted to find out whether the state manages its commercial undertakings prudently, as required under the State Assets Act. More specifically, the National Audit Office wanted to find an answer to the question whether the state participates in commercial undertakings expediently and guarantees the protection of its interests via efficient owner’s supervision. The National Audit Office also wanted to find out whether the goals set to the undertakings are considered when dividends are taken from them and whether the reason why undertakings need extra money is clear when more capital is given to them. In order to achieve the goal of the audit the National Audit Office assessed the organisation of management in nine public undertakings (Eesti Energia AS, Elering AS, AS Estonian Air, AS Eesti Raudtee, Lennuliiklusteeninduse AS, AS Tallinna Sadam, AS Eesti Loto, AS Andmevara, AS Eesti Kaardikeskus) and the activities of the ministries that manage holdings in these undertakings (Ministry of Economic Affairs and Communications, Ministry of Finance, Ministry of the Interior and Ministry of the Environment).

Toomas Mattson
Head of Communication Service, National Audit Office
+372 6 400 777
+372 51 34 900
toomas.mattson@riigikontroll.ee

  • Posted: 9/17/2013 4:26 PM
  • Last Update: 8/16/2015 12:22 AM
  • Last Review: 8/16/2015 12:22 AM

The Minister of Economic Affairs and Communications who manages the largest public undertakings agreed mostly with the conclusions and recommendations made by the National Audit Office, but the Minister of Finance who coordinates the management of public undertakings did not agree with them at all.

Toomas Huik/Postimees/Scanpix Baltics

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